After I posted about The Rule of 72, I realized I had forgotten to mention that The Rule can be used against you as well. Here are some examples of how you can use The Rule of 72 to find the time bombs in your financial situation.

Use the Rule of 72 to calculate the impact of inflation

For example, inflation is a constant concern of most investors. Everyone knows that a 3% rate of inflation is better than 5%, but either way, the number is small, so why worry, right?

Wrong!

At a 5% rate of inflation, the cost of goods and services double every 14.4 years (!). That means the college tuition that today is $5000 a year will cost your3 year old child $10,000 a year when he is off to college.

The Rule of 72 will tell you how much credit cards cost you

Just like you lend money at interest (in debt instruments like bonds) to make money, so do the credit card companies. Of course, they get better rates of return than you do. Ever wonder just how much that dinner you bought on credit really costs?

A $100 date with your wife, put on a credit card at 20% interest, will end up costing $200 if you don’t pay the card off in 3 and a half years or so (obviously, if you make payments and so on, it will take longer).

The Rule of 72 will show you at a glance how much that decision to borrow money will really cost you.

Pretty much everyone knows that the name of the game is to get a good rate of return on your money. After all, you do not have to be a genius to know that getting 8% on your money is a better thing than getting a 6% rate of return. But, just how much better is it?

How long until your money doubles?

If you have a 12% average rate of return on your money (say, in an index fund), then your money will, all things being equal, double in just six years. Drop your rate of return down to 10% (still respectable by anyone’s definition) and now it takes a bit over seven years to double. Bump your rate of return up a bit and get a 13% average and your money doubles in 5 and a half years.

If you do not happen to be a math super genius, you can calculate how long it will take your money to double at a given interst rate by useing the rule of 72.

Money invested at 1% interest will double every 72 years. If you get a higher rate of return, just divide 72 by the rate of return and the answer is the number of years until your investment fund doubles.

Example:

I have $1000 and will put it in the bank at 5% interest. How long until I have $2000?

72 divided by 5 = 14.4 years (better not need it soon!).

While not precise, it is accurate enough for quick calculation and quickly shows the value in getting the highest rate of return possible on your money.

In my post yesterday, I mentioned 529 Plans as a great tool to save for college.  I thought I would expound on them a bit today.

A 529 Plan is a investment account in the United States  that allows you to save for college in a tax-advantaged manner. You get to save money for the education expenses of a specific person, called the beneficiary. The plan is named after section 529 of the US Internal Revenue Code.

Each state has its own plan, with significant differences from state to state, but because of the underlying federal legislation, they all have quite a few things in common.

Two Plans

The first thing you should know is that there are actually two types of plans; a pre-paid one and an investment one.

• The pre-paid plan is basically what it sounds like; you pay the current tuition now, and when they go to school, the bill has been paid. In other words, you are paying future expenses with current dollars.  Generally, this is not a good idea. Besides, the problem for most people is they don’t have the money to pay for college; thus, they need to save for it.

• The investment plan is based on investment options in the account, usually mutual funds. Most plans offer quite a few options, both equity and debt based (stock funds and bond funds). You can typically move the money within the account from fund to fund as your needs change. The inner workings (as far as the owner are concerned ) are a lot like your 401K at work; there is the Growth fund, the Aggressive Growth fund, the Risk Free (savings) fund and so on.

The investment plan is best for most folks. While it is administered by the state, the day to day operation is typically out-sourced to a mutual fund company. You are not required to use the plan offered by the state you live in but there may be tax advantages to doing so; do your research or ask your adviser.

Pros and Cons

Pros:

• All growth is income tax free (both state and federal).
• Beneficiary can be changed to another family member.
• Most states do not tax withdrawals as long as they are used for education.
• Withdrawals can pay for tuition, fees, dorm expense, books and almost any educational expense.
• Very High Contribution Limits
• A very attractive estate planning vehicle for those who qualify.
• 529 Plans offer some bankruptcy protection.
• Very low minimum monthly contribution limits, putting it in the range of most budgets

Cons:

The only real con is that some states have outrageous fees. You can use this website to find out the details of your state’s plan and can use it to compare the fees. In fact, sometimes the excessive fees are a good enough reason to abandon your state’s plan in favor of another, even disregarding the tax benefits you get from staying in state.

There are certain steps to take when you are creating an investment portfolio and different things to consider. This quick guide will help you to figure out exactly what you need to do to make your money work for you.

a. Figure out what you are saving for

It’s always a good idea to outline your goals and this way you know exactly what you are planning to do. Are you doing this so that you have money for college for your kids? Are you looking to buy a house, a new car? Or is this going to create a nest egg for when you retire?

b. Figure out when you will need the money

Next you are going to figure out when you are going to need the money. Obviously, it’s not a good idea to invest if you need the money within a few weeks. It’s always a good idea to plan ahead with your investments. But planning ahead will help you to understand how much of a return you will need on your investment. Depending on how long you can keep the money invested, you might put it into stocks, mutual funds, bonds, etc.

c. Figure out how much to invest

Don’t invest more money than you can afford to invest. If your circumstances change, you can always invest more money later. Always make sure you have an emergency fund (cash on hands) that will cover your expenses for at least 3-6 months should something unexpected happen.

d. Figure out your risk factor

Decide how much of a risk you are willing to take. There are plenty of investments that offer better returns but with a risk factor that is higher than others. If you love risk invest in penny stocks. If you hate to risk, mutual funds are probably the best choice for you. But sometimes it is best to diversify. Put some money into stocks, some into mutual funds, etc. This way the risk will be moderate, but return can be higher than if you just invested into mutual funds, for example.

e. Put it all together

Once you know the details of your investment, put it together in a portfolio, including when you need the money, how much to invest, and what you are expecting as a return.

f. Speak with a counsellor

Next you want to go and talk to a counsellor who specializes in investing and see if they can offer any advice to help you to achieve your goals. Or you can save some money and figure this out yourself if you are educated enough to make this kind of decisions. But since you are reading this you are probably interested in making this kind of decisions yourself, sooner or later.

g. Look over your portfolio

You should take your portfolio out at least once a year and see where you are with your investment. Preferably more often.

Can you believe it, by studying Lara Croft’s adventurous lifestyle - we can learn some valuable lessons about looking after our own personal finances.

Don’t believe me? Then you’d better read on!

Lara would make sure that the biggest threats are dealt with first. The first problem with personal finances, that many of us need to deal with, is debt.

Our main priority should be to get rid of high interest debts like credit cards, loans and yes, even mortgages. Once you have battled with these giants and won, you can start to invest safe in the knowledge that your investment will have higher returns than your debt interest.

In our lifetimes there are several fatal personal finance mistakes that we can make, that even a lithe Lara Croft would not be able to dodge!

We have a tendency to purchase debt by agreeing to pay for something over a few years so we can have it now - like cars. Cars lose value very quickly, yet we will still be paying the premium price for it over x amount of years. Other fatal personal finance mistakes people make is paying out for small expenses that add up like seeing all the latest movies, buying lunch everyday instead of packing it, buying luxury food items, a gym membership that has hardly been used, etc.

You have to be in control of your lifestyle and be disciplined with your finances.

If we are not careful, we run the risk of creating more bullets to dodge by creating more expensive lifestyle habits when we get a pay rise and we do things like buy an expensive new car instead of choosing to invest that money wisely.

Lara Croft would always make sure that she is safe before saving anyone else! So your mission is - get in a position where you can put 10% of your monthly income aside for future investments, to ensure your own personal financial security. Don’t let the Big Boys and Bullets keep you down! Lara wouldn’t!

Do you want to start investing really bad but cannot afford to do so? Back in 2000 I was in the same boat as you. I didn’t have enough money to invest, but wanted to do so very much. I was learning as much as I could, but due to lack of funds I was going to wait until I have more money before I start.What a mistake! Why? Because over time I lost interest in learning, and slowly got occupied with other things. So I thought, what the heck, I will invest a little bit. I did research, opened an account with Sharebuilder, and put $500 into Marvel, since it seemed like a stable company poised to grow.

What this did for me? I was checking out the markets every single morning, and since my stock was doing really good (I eventually made very nice return on this investment) it kept me interested even more. I learned a lot over that time even though I had very little invested. Definitely far from enough to make me rich. But I thought this was a great idea, and I still think that today. It really kept me involved.

So do research and invest a little bit. Do not wait too long. $100-$200 should do it if you are low on money. It will keep you interested in stock market and you will have much more motivation to learn since you will actually have money invested.

You can open an account with Sharebuilder, if you are in United States since they do not require high initial deposits and are perfect for beginners. Start now. You will have fun doing it, trust me!

When you have invested money, it’s important to keep good tabs on the money that you have invested. Otherwise you might find that you are in trouble without even knowing it.

a. Keep track of your papers

When you receive paperwork pertaining to your investment, first look it over to make sure that everything is the way that it should be. Then you want to make sure that you put it in a safe place so that you know exactly where it is.

b. Take a notebook with you to appointments

It’s always a good idea to make notations about what your financial adviser says to you. You never know when it could come in handy.

c. Have someone else to help you

It’s always good to have someone else who you trust handling your investment. If you are to get sick or otherwise incapacitated, this is a safeguard for your investments. Make sure this person gets copies of all of your paperwork and is aware of what your investments are.

d. There is no such thing as a dumb question

If there is something that you don’t understand, ask. That’s what your financial advisor is there for, and you may just catch something that they hadn’t. Never be embarrassed to ask about something that you don’t understand.

e. Put the Internet to work for you

Take advantage of the Internet and track your investments online. This will prove to be an invaluable tool that will help you out in the long run.

f. Review your investments

Take your portfolio out at least once a year and look it over to make certain that you are on the right path. If you can, it’s best to bring it out every three months to give you a better perspective.

g. Meet with your advisor

If you are working through a broker or an advisor, meet with them at least once a year.

You don’t? Well, without one don’t even think about getting into investing. As a matter of fact, even if you don’t have plans to invest, never be without an emergency fund, period. So what is an emergency fund? It is cash, which will cover your 3-6 months expenses. If for example, you lose your job tomorrow you will have enough cash on hand to pay off all your expenses during the next 3-6 months, which should be sufficient time for you to get a new job.

The best of all even this emergency fund, put into an extra safe money fund, can grow 5 percent per year on average. So this money won’t be sitting still. It will be working for you, yet it will be readily available should something unexpected happen. So if you do not have an emergency fund, do not wait, start saving now. Each month put aside a little bit of money and in a couple of years you should have your emergency fund ready. Having an emergency fund that will cover even one month of expenses is better than none. But ideally aim for at least 3-6.

So what are you waiting for? Go ahead and start making plans on how to setup your emergency fund. That is, if you don’t have one already. And if you are beginner you probably don’t, just like I didn’t have one when I first started learning about the world of finances. Now I do, and it does give me peace of mind.

When it comes to choosing a financial planner, there are certain steps that you should take to make the process go as smoothly as possible and to make certain that you get the financial planner who will best suit your needs and give you the advice and help that you will need. We’ll go through the steps one by one and by the time we are done, you will have all the information that you will need to make an informed choice about choosing a financial planner.

1. Figure out your goals

The first step in choosing a financial planner is to figure out what your goals are for your life and your finances. This will better assist any potential financial planners in figuring out how to best help you. Do you want a college education? A comfortable retirement? Or something else?

2. Decide how to fill your needs 

Next you should figure out how much financial planning help you will need, and whether a local office can help you or if you will need the services of a nationwide firm. Remember, with a wider range of services comes a bigger price. Before you pay a lot of money to a big firm make sure that you are going to use their services to the fullest.

3. Ask for recommendations

Talk to your family and friends and see if there is anyone that they recommend. Before making your choice, talk to three different candidates and make certain that they take into account the debt that you have when they are creating the plan that they will have for you.

4. Check the credentials of candidates

Once you have interviewed the possible planners, you should look into their credentials and see what they have to offer. If they are a certified financial planner, there are exams that they will have passed. Even if they aren’t certified, there may be areas of expertise that they offer like insurance and investing. You can also contact American Financial Planners and get a list of credentials and where planners can receive them.

5. Find out the planner’s philosophy.

Some financial planners strongly believe in investing, while others act more conservatively. Make certain that the financial planner that you choose is willing to take into account your comfort level and needs, since this is your money that will be affected.

6. Find out the bottom line

Before you choose a financial planner, find out exactly what the compensation will be for their services. Sometimes they sell financial planning products based on commission, while others will charge a flat fee. They may be willing to negotiate with you if you tihnk that their price is too high in order to get your business.

7. Ask for references

Request references from other clients who have similar needs and goals as you have. If the planner is unwilling to offer them to you, go with someone else.

8. How will you keep in contact

Set up a schedule for talking to your financial planner and find out how you will be in contact with them. Finally, find out what will happen if your finances begin to drop, if you will need to contact them or if they will call you.

Long term investing is something that many people do not like to become involved in too quickly. Firstly, this is because they probably do not know much about it, and secondly are very nervous about not being able to use that money for many years.

Long term investments have many advantages for patient investors. Lots of people make the mistake of investing short term, simply because they are scared, and can end up losing everything because of a major crash in the markets. By investing long term, you are giving the markets opportunities to recover from any losses, and you can end up making nice  money. The long term investor may not see his or her money growing that much every day, but they will reap in the benefits later on.

If you choose to take out a long term investment with your financial institution, you also have the potential to make a large amount of money, by doing very little other than wait. Many long term investment programs will offer more appealing higher interest rates than short term investments, and some of the plans also offer compound interest, which means that your interest will also earn interest.

Another advantage of long term investing is the tax implications. Those who qualify for long term investing according to taxes are those that have invested in stocks for over a year. If you qualify you will pay less capital gains tax than those who take out short term investments. You also have more time to do other things besides investing.

Long term investing is popular because you do not have to be constantly watching the markets and hoping for them to rise before your time is up. This also saves on expenses because you do not need to have real time information sent to you every second of the day. You save on software, time, and as competition is not as severe as short term investing, you will have less to worry about.